Accounting Instruction Reference #300: Adjusting Entries & Financial Statement Creation

This book covers the adjusting journal process of financial accounting and the creation of financial statements, the creation of financial statements being the end goal of financial accounting, the product that the financial accounting system is designed to produce. Financial statements are the primary tool decision makers use when making financial decisions. Financial statements are

This book covers the adjusting journal process of financial accounting and the creation of financial statements, the creation of financial statements being the end goal of financial accounting, the product that the financial accounting system is designed to produce. Financial statements are the primary tool decision makers use when making financial decisions. Financial statements are the preferred format for financial data to be compiled. After normal business transactions have been input into the accounting system throughout a period, an adjusting process is often needed before the data is then compiled into financial statements, the adjusting process helping to covert financial data to a more perfect accrual system. The adjusting journal entries are often one of the most difficult areas of the accounting process for learners to understand, and is one of the most important topics needed for fully grasping accrual accounting concepts. A solid understanding of the adjusting process, and the reasons for the adjusting process, provides learners the tools needed to explain the difference between a cash basis and an accrual basis of accounting and the reasons an accrual basis is the preferred format for compiling accounting data. We will start our learning of the adjusting process with a review of topics covered in prior texts, including a description of the overall financial accounting process, and the rules for recording normal transactions. If you do not have an understanding of what financial accounting is, or how to record normal journal entries, it is recommended that you read our prior texts first, Accounting Instruction Reference # 100 and Accounting Instruction Reference # 200. We will then describe what the adjusting process, is and how to think about the adjusting process, how the adjusting process fits into the overall financial accounting process, and what makes the adjusting process different. Then we will explain the rules for adjusting journal entries, some being the same as those for all journal entries, but some differing. Next, we will discuss the adjusting process worksheet we will use in the adjusting process, and why a worksheet is needed. After that, we will list and explain the most common adjusting entries, providing practical examples for walking through the process of recording adjusting entries step by step. Finally, we will use the adjusted trial balance to construct financial statements, the balance sheet, the income statement, and the statement of owner’s equity. We will demonstrate a step by step process for the creation of each financial statement, show how the financial statements are related, and explain how a trial balance, which has an equal number of debits and credits, must be convertible into financial statements that are, “in balance.”